Topic 5 - Finance Flashcards
(55 cards)
1
Q
What is breakeven?
A
understanding the breakeven position is key to understanding what a business needs to do to operate profitably
2
Q
Contribution
A
- looks at the profit made on individual products
- it is used in calculating how many items need to be sold to cover all the business’ total costs
3
Q
Contribution Formula
A
total sales - total variable costs
contribution per unit x number of units sold
4
Q
Contribution per Unit Formula
A
selling price per unit - variable costs per unit
5
Q
Profit
A
contribution - fixed costs
6
Q
Breakeven Chart
A
(Look at book)
7
Q
What is the margin of safety?
A
is the actual difference between the actual output and the breakeven output
8
Q
What is a budget?
A
a financial plan for the future concerning the revenues and costs of a business
9
Q
Uses of budgets in management
A
- allocate resources
- communicate targets
- motivate staff
- improve efficiency
- forecast outcomes
- provides direction
- control income and expenditure
10
Q
Two main approaches to budgeting
A
Historical Budgeting
Zero Budgeting
11
Q
What is historical budgeting?
A
- use last years figures as the basis for the budget
- realistic in that it is based on actual results
- circumstances may have changed
- does not encourage efficiency
12
Q
What is zero budgeting?
A
- budgeted costs and revenues are set to zero
- budget is based on new proposals for sales and costs
- makes budgeting more complicated and time-consuming, but potentially more realistic
13
Q
Three Main Types of Budget
A
Revenue (or income)
Cost (or expenditure)
Profit
14
Q
Two Key Sources of Information for Budgets
A
- financial performance in previous periods
- market research
15
Q
Variance Analysis
A
calculating and investigating the difference between actual results and the budget
16
Q
Variances can be…
A
- positive/ favourable (better than expected)
- adverse/ unfavourable (worse than expected)
17
Q
Favourable Variances
A
- actual figures are better than budgeted figure
- e.g. costs lower than expected
- e.g. revenue/ profits higher than expected
18
Q
Adverse Variances
A
- actual figures worse than budget figure
- e.g. costs higher than expected
- e.g. revenue/ profits lower than expected
19
Q
Why is cash flow important?
A
- cash flow is dynamic and unpredictable part of life for most businesses
- cash flow problems are the main reason why a business fails
20
Q
Cash Inflows Examples
A
- cash sales
- sale of fixed asset
- interest on bank balances
- grants
- loans from bank
21
Q
Cash Outflow Examples
A
- payments to suppliers
- wages and salaries
- tax on profits
- dividends paid to shareholders
- repayment of loans
22
Q
What is cash flow problem?
A
when a business does not have enough cash to be able to pay its liabilities
23
Q
Main causes of Cash Flow Problems
A
- low profits or (worse) losses
- excess inventories held
- allowing customers too long to pay
- seasonal demand
- unexpected changes in the business
24
Q
Managing Working Capital
A
- inventories
- debtors
- creditors
25
Managing Amounts Owed by Customers
- credit control
- selling off debts to debt factors
- cash discounts for prompt payment
26
What is Debt Factoring?
- the selling of debtors (money owned to the business) to a third party
- this generates cash
- it guarantees the firm a percentage of money owed to it
- cost involved in factoring can be high
27
What is credit control?
- establishing credit limits for new customers
- credit checking new and existing customers
- setting realistic credit limits
- determine appropriate terms and conditions for credit
28
Long-Term Sources of Finance
- finances the whole business over many years
e.g.
- share capital
- retained profits
- venture capital
- mortgages
- long-term bank loans
29
Medium-Term Sources of Finance
- finances major projects or assets with a long-life
e.g.
- bank loans
- leasing
- hire purchase
- government grants
30
Short-Term Sources of Finance
- finances day-to-day trading of the business
e.g.
- bank overdraft
- trade creditors
- factoring
- short-term bank loans
31
Main Internal Sources of finance for a Start Up Business
- founder finance
- retained profits
- friends and family
32
Main External Sources of finance for a Start Up Business
- bank loan
- bank overdraft
- loans and grants
33
Main Internal Sources of finance for an Established Business
- retained profits
- working capital
- asset disposal
34
Main External Sources of finance for an Established Business
- issue shares
- bank loan/ overdraft
- debentures
- suppliers
35
Ways of Raising Loan Capital
- bank overdraft
- bank loan
- debentures
36
Bank Overdrafts
short-term finance, widely used by businesses
the bank lets the business 'owe its money' when the bank balance goes below zero, in return for charging a high rate of interest
flexible
37
Bank Loans
long-term finance
good for financing investment in fixed assets
generally at a lower rate of interest that a bank overdraft has
not much flexibility
38
Debentures
a debenture is a form of bond or long-term loan which is issued by the company, usually with a fixed rate of interest
39
What is a financial objective?
a specific goal or target of relating to the financial performance, resources and structure of a business
40
Profit Formula
Total Revenue - Total Costs
41
Cash Flow Formula
Total Cash Inflows - Total Cash Outflows
42
How does Cash Flow differ from Profit?
timing differences
- sales to customers made on credit
- payment to suppliers
the way fixed assets are accounted for
cash flows arising from the way the business is financed
43
What is Business Investment?
- capital expenditure on items such as product machinery, IT systems, buildings etc.
- can also be the purchase of other businesses or brands
- investment is intended to help generate a return over more than one year
44
Equity
amount invested by the owners of the business
45
Debt
finance provided to the business by external parties
46
What is ratio analysis?
analysing relationships between financial data to assess the performance of a business
47
Gross Profit Formula
revenue - cost of sales
48
Gross Margin (%) Formula
gross profit/ revenue
49
What is operating profit?
is what is left after all the costs of a business have been taken from its revenues
50
Operating Profit Margin Formula
operating profit/ revenues x 100
51
Revenue Formula
volume sold x average selling price
52
Two main ways for a business to increase revenues
- increase quantity sold
- achieve higher selling price
53
Variable Costs
- costs which change as output varies
e.g.
raw materials
wages based on hours
54
Fixed Costs
- costs which do not change when output varies
e.g.
rent and rates
salaries
advertising
55
Total Costs (TC) Formula
fixed costs (FC) + variable costs (VC)
